tax repor #92t 3 - nysba.org

Tax Report 923

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One Elk Street Albany New York 1 2207 bull 5 1 8463-3200

TAX SECTION MEMBERS-AT-LARGE OF EXECUTIVE COMMITTEE Dianne Bennett Kenneth H Heitner Lisa A Levy Ronald A Morris

1997-1 998 Executive Committee Benjamin JCohen Thomas A Humphreys James R MacDonald IV Leslie B Samuels

RICHARD 0 LOENGARD JR Chair Fried Frank Harris el al One New York Plaza New York NY 10004 212859-8260

STEVEN CTODRYS first Vice-Chair 212455-3750

HAROLD R HANDLER Second Vice-Chair 212455-3110

ROBERT H SCARBOROUGH Secretary 212906-2317

COMMITTEE CHAIRS

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Basis and Cost Recovery Elliot Pisem Deborah H Schenk

CLE and Pro Bono James A Locke Victor Zonana

Compliance Practice amp Procedure Robert SRnk Arnold Y Kapitofl

Consolidated Returns JoelScharfstein David RSicular

Corporations Patrick C Gallagher Robert A Jacobs

Estates and Trusts Sherwin Kamin Cartyn S McCaffrey

Financial Instruments Samuel J Dimon Bruce Kayte

Financial Intermediaries ErikaW NSenhuis Andrew Solomon

Foreign Activities ofUS Taxpayers

Reuven S Avi-Yonah DavidPHariton

Fundamental Tax Reform Peter vZCobb Deborah L Paul

Individuals Sherry S Kraus Ann F Thomas

Multistate Tax Issues Robert E Brown Paul R Comeau

Net Operating Losses David S Miller Ann-Elizabeth Purintun

New York City Tax Matters Robert JLevinsohn WMamB Randolph

MaMii VwV GtaiA FnnsraquohllaquoA anrt ITCW Twin OHIO rioncnwc aftu Income Taxes

Maria TJones Arthur R Rosen

New York State Sales and Misc William FCollins HcflisLHyans

Nonqualified Employee Benefits SkjartNAIpenn Kenneth CEdgar Jr

Partnerships Andrew N Berg William B Brannan

Pass-Through Entities Kimberiy o Blanchard Marc L Siiberberrj

^aephenfundo Loran T Thompson

MidwIHrschleld Alan J Tan

Reorganizations EncSolomon

Tax Accounting Dtckson G Brown Stephen B Land

Tax Exempt Bonds Linda LDOnohio PatUTWu

^ssatfamps Stuart L Rosow

JohnDugan Charles 1 Kingson Charles M Morgan III Robert T Smith

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Euaene L Voael OavidEWatts

Mary Kate Wold

March 11 1998

Honorable Donald C Lubick Assistant Secretary (Tax Policy) Department of the Treasury 1500 Pennsylvania Avenue NW Room 3 120 Washington DC 20220

Honorable Charles 0 Rossotti Commissioner Internal Revenue Service 1111 Constitution Avenue NW Washington DC 20224

Dear Secretary Lubick and Commissioner Rossotti

I am pleased to enclose a report prepared by the Committee of Estates and Trusts of the Tax Section of the New York State Bar Association commenting on the proposed regulations under Section 7701(a)(30)(E) and (3 l) fjhejntenial Revenue J3odpoundpoundCode) relating to the determination of whether a trust is foreignlfor

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-riT i~~lryrirmdash bull w - - gJ bullbull - - shypTapOseTofuie Code The proposed regulations implement changes in the Code enacted as part of the Small Business Protection Act of 1996

The report urges that consideration be given to amending the Code to extend to all trusts an election similar to that given by Section 1 161 of the Taxpayer Relief Act of 1997 to trusts in existence on August 20 1996

FORMER CHAIRS OF SECTION Howard OCokjan Jr JohnWFager Alfred D Youngwood Richard G Cohen Peter C Canellos Charles L Kades John E Morrissey Jr Gordon D Henderson Donald Schapiro Michael L Schler

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US Activities of Foreign

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Samuel BrodskyThomas C Pkmden-WardlawEdwin M JonesHon Hugh RJonesPeter Miller

Charles E Herring Ralph 0 Winger

Martin D Ginsburg Peter LFaber

Hon Renato Beghe

David Sachs J Roger Mentz

WiHard B Taytor Richard J Hiegel

Dale S Coffinson

Herbert L Camp William L Burke Arthur A Feder James M Peastee John A Corny

Carolyn Joy Lee Richard L Reinhold

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Until such time as such legislative relief is enacted the report urges that the proposed regulations be modified to reduce their apparent bias in favor of treating trusts as foreign Thus the report urges that the tests set forth in the proposed regulations for determining when a trust is foreign be modified to reduce the risk that US persons wishing to organize a domestic trust may inadvertently fail to meet such tests and find that they have inadvertently organized a foreign trust The report recognizes that as currently drafted the regulations gives desirable assurance to foreigners that trusts which they wish to treat as foreign trusts will be so treated but suggests that certainty can be given to foreigners without the use of tests which may prove to be a trap for unwary US persons wishing to create domestic trusts The report comments on specific portions of the proposed regulations noting the provisions which are particularly likely to give rise to these difficulties and suggests changes to ameliorate the problems

Finally the report approves the regulatory confirmation that foreign trusts will not be treated as present in the United States for purposes of Section 871(a)(2) of the Code while noting that this result is now embodied in Code Section 641(b) as well

If we can be of any further assistance to you or your staff in finalizing these regulations please contact either Carlyn McCaffrey the principal drafter of this report at (212) 3 10-8136 or the undersigned

Sincerely

jf 1

Richard O Loengard Jr Chair

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CC Stuart L Brown Chief Counsel Internal Revenue Service 1111 Constitution Avenue NW Room 3026 Washington DC 20224

Jonathan Talisman Deputy Assistant Secretary (Tax Policy) Department of the Treasury 1500 Pennsylvania Avenue NW Washington DC 20220

Joseph H Guttentag Deputy Assistant Secretary - Intl Tax Affairs Department of the Treasury 1500 Pennsylvania Avenue NW Room 1334 Washington DC 20220

Philip R West International Tax Counsel Department of the Treasury 1500 Pennsylvania Avenue NW Room 4206 Washington DC 20220

James A Quinn Internal Revenue Service (CCDOMCORPR (Reg - 251703-96) PO Box 7064 Room 5226 Ben Franklin Station Washington DC 20044

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NEW YORK STATE BAR ASSOCIATION TAX SECTIONCOMMENTS ON PROPOSED REGULATION sect 3017701-7 -

TRUSTS -DOMESTIC AND FOREIGN1

This report comments on proposed regulation sect 3017701-7 relating to new Codesect 7701(30)(E) and (31) which provides a new rule for determining whether a trust is aUnited States person or a foreign person The proposed regulation which was issued onJune 5 1997 also sets forth the United States income tax consequences of foreign truststatus

New Code sect 7701(a)(30)(E) and (31) was enacted as part of the Small BusinessJob Protection Act of 1996 (the Act) Under prior law there was no clear standard fordetermining a trusts nationality The former statutory definition consisted only of astatement that a foreign trust is a trust

the income of which from sources without the United States which is noteffectively connected with the conduct of a trade or business within the UnitedStates is not includible in gross income under Subtitle A

This statement is merely descriptive of the consequences of foreign trust status anddid not give any guidance as to the determination of whether that status existed Judicialand administrative authority partially filled the definitional gap by establishing a test thatrequired the weighing of a trusts foreign contacts against its United States contacts2

Because other provisions of the Act impose major requirements and potentialpenalties on trusts that are classified as foreign Congress believed it appropriate toprovide a more objective test for determining whether a trust is a United States person (adomestic trust) or a foreign trust3

In addition the Treasury Department which originally proposed the definitionalchange wanted to

increase the flexibility of settlors and trusts administrators to decide where tolocate and hi what assets to invest For example if the location of the

This report was prepared by the Committee on Estates and Trusts of the Tax Section of the New York State BarAssociation Its principal drafter was Carlyn S McCaffrey Helpful comments were received from SherwinKamin Richard O Loengard Jr and David Miller

2 See eg B W Jones Trust v Commissioner 132 F 2d 914 (4th Cir 1943) First National City Bank vInternal Revenue Service 271 F 2d 616 (2d Cir 1959) cert denied 361 US 948 (1960) Rev Rul 60-1811960-1 CB 257

3 See House of Representatives Report No 542 104th Cong 2d Sess 25 (May 3 1996) (House Report) andJoint Committee on Taxation General Explanation of Tax Legislation Enacted in the 104th Congress 270(December 18 1996)(Blue Book)

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administration of the trust were no longer a relevant criterion settlors of foreign trusts would be able to choose whether to administer the trusts in the United States or abroad based on non-tax considerations4

We understand that one of the principal objectives Treasury sought to achieve by implementing this new definition was to level the competitive playing field for trust business between United States and foreign institutions Under the former definition a foreign person who might have preferred to use a United States financial institution as trustee was generally reluctant to do so because of the likelihood mat the trust would have been taxed as a United States domestic trust Under the new law a foreign person can easily use a United States financial institution without creating a domestic trust5

New Code sect 7701(a)(30)(E) and (31) established the following two requirements a trust must satisfy if it is to be characterized as domestic

1 A court or courts within the United States must be able to exercise primary supervision over administration of the trust and

2 One or more United States fiduciaries must have the authority to control all substantial decisions of the trust6

Any trust that does not satisfy both requirements is a foreign trust

Although the new Code provision establishes a more objective method for determining whether a trust is domestic or foreign it falls short of establishing the bright line test that should be established in view of the harsh penalties that may be imposed as a result of the foreign status of a trust Moreover the new definition did nothing to disengage the operation of Code sect 871(a)(2) Under this provision a foreign trust which had a United States financial institution as its trustee might have been treated as present in the United States by reason of the residence of its trustee Such treatment would expose the foreign trust to United States income taxation on gain from the sale of investment assets This result would be inconsistent with a Congressional intent to encourage foreign persons to use United States financial institutions as trustees7

The proposed regulations significantly decrease the ambiguities in the statutory

4 Treasury Department General Explanation of the Administrations Revenue Proposals 25 (February 7 1995)(Treasury Explanations)

5 This understanding is based on conversations between David K Sutherland former Associate International Tax Counsel and a principal draftsperson of the new statutory definition and certain of the individuals who participated in the preparation of this report

6 Section 1601(i)(3)(A) of the Taxpayer Relief Act of 1997 changed the word fiduciaries to persons

The possibility oPthis result was abrogated by sect 1601(i)(3)(B) of the Taxpayer Relief Act of 1997 which provides that for purposes of determining the taxable income of a foreign trust (or foreign estate) the foreign trust shall be treated as if it were an individual who is not present hi the United States at any time

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I definition and resolve the problem under Code sect 871(a)(2)

Proposed Regulation sect 3017701-7

I In General

A The Definition

1 The Safe Harbor

The proposed regulation creates a safe harbor that will ensure domestic trust status even if technical compliance with Code sect 7701(a)(30)(E) has not been achieved The safe harbor which is described in paragraph (c) of the proposed regulation provides that a trust is a domestic trust if the following three requirements are met

a The trust has only United States fiduciaries as defined in paragraph (e) of the proposed regulation

b The trust is administered exclusively within the United States pursuant to the terms of a trust instrument

c The trust is not subject to an automatic migration provision described in paragraph (d)(2)(v) or (e)(3) of the proposed regulation

Trusts mat are not secure within the safe harbor must satisfy both the court test and the control test to be domestic trusts

2 The Court Test

The court test which is described in paragraph (d) of the proposed regulation is the regulatory explanation of the statutory requirement that a court or courts within the United States must be able to exercise primary supervision over administration of the trust The explanation provides the following critical definitions

a Court includes federal as well as state and local courts

b United States means the fifty states and the District of Columbia

c Is able to exercise means that a court has or would have the authority under applicable law to render orders or judgments resolving issues concerning administration of the trust

d Primary supervision means the judicial authority to determine substantially all issues regarding the administration of the entire trust even if another court has jurisdiction over a trustee a beneficiary or trust property

e Administration means the carrying out of the duties imposed on a

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fiduciary by the terms of the trust instrument and applicable law including maintaining the books and records of the trust filing tax returns defending the trust from suits by creditors and determining the amount and timing of distributions

Paragraph (d) of the proposed regulation describes four types of trusts that satisfy the court test and one that does not The four types that satisfy the court test are

a Trusts that are registered in a court within the United States by an authorized fiduciary under a state statute substantially similar to the Uniform Probate Code Article Vn Trust Administration8

b Testamentary trusts if all fiduciaries of the trust have been qualified as trustees by a court within the United States

c Inter vivos trusts if the fiduciaries andor beneficiaries take steps with a court in the United States to cause the administration of the trust to be subject to the primary supervision of such court

d Trusts that are subject to primary supervision with respect to their administration by a United States court and a foreign court

The type of trust that does not satisfy the court test is a trust whose trust instrument contains a provision that would cause the trust to migrate from the United States if a United States court attempted to assert jurisdiction over it or attempted to supervise its administration

1 The Control Test

The control test which is described in paragraph (e) of the proposed regulation is the regulatory explanation of the statutory requirement that one or more United States fiduciaries must have the authority to control all substantial decisions of the trust The explanation provides the following critical definitions

a Fiduciary includes any person described in Code sect 7701(a)(6) and Treas Reg sect 3017701-6(b) Code sect 7701(a)(6) and its corresponding regulation define fiduciary as a trustee or any person acting in any fiduciary capacity for any person In addition the term includes any person whether or not she is a fiduciary within the meaning of Code sect 7701(a)(6) who has the power to control one or more substantial

8 sect 7-201 of the Uniform Probate Code gives exclusive jurisdiction over the internal affairs of a trust to the courts of the state in which a trust is registered Sixteen states have adopted the Uniform Probate Code They are Alaska Arizona Colorado Florida Hawaii Idaho Main Michigan Minnesota Montana Nebraska New Mexico North Dakota South Carolina South Dakota and Utah 8 Uniform Laws Annotated 1 (West Supp 1996)

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decisions of the trust as defined below9

b United States fiduciarymeans a fiduciary that is a United States person within the meaning of Code sect 7701(a)(30) including for example individuals who are United States citizens or residents domestic corporations and domestic partnerships

c Substantial decisions means with an important exception described below all decisions other than ministerial decisions that any person is authorized to make under the terms of the trust instrument or applicable law Such decisions include but are not limited to

(1) The timing and amount of distributions

(2) The selection of beneficiaries

(3) The power to make investment decisions

(4) The power to determine whether receipts are allocable to income or principal

(5) The power to terminate the trust j

(6) The power to compromise arbitrate or abandon claims of the trust and to decide whether to sue on behalf of or defend suits against the trust and

(7) The power to remove add or replace a trustee

Ministerial decisions include decisions regarding details such as the bookkeeping the collection of rents and the execution of investment decisions made by the fiduciaries

A decision is not a substantial decision if it can be made by a grantor or in the case of a decision that affects the portion of a trust in which a beneficiary has an interest by that beneficiary unless the grantor or the beneficiary as the case may be is acting as a fiduciary under Code sect 7701(a)(6) (a sect 7701(a)(6) fiduciary) This means for example that the power to revoke a trust exercisable by an individual holding a power of appointment who is neither a beneficiary nor the grantor is the power to make a substantial decision but that such a power held by the grantor is not

d Control means the power to make all of the substantial decisions of the

9 This definition of the term fiduciaries is no longer needed in view of sect 1601(i)(3)(A) of the Taxpayer Relief Act of 1987 which changed the word fiduciaries to persons

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trust with no other person having the power to veto such decisions other than the grantor or a beneficiary acting with respect to her interest in the trust (unless the grantor or beneficiary is acting as a Code sect 7701(a)(6) fiduciary)

If an inadvertent change in fiduciaries would cause a trust to change residence the proposed regulation permits the trust to retain its pre-change status if the fiduciaries are adjusted within six months of the inadvertent change10 Inadvertent changes include the death of a fiduciary or her abrupt resignation

A The Code sect 871(a)(2) Issue

Code sect 871(a)(2) provides that a nonresident alien individual who is present in the United States for a period of 183 days or more in a taxable year is subject to a 30 percent tax on her net gains allocable to sources within the United States Under Code sect 865(a)(l) the sale of personal property is generally sourced according to the residence of the seller But under Code sect 865(e)(2)(A) a nonresident alien who maintains an office in the United States has United States source income to the extent she sells personal property attributable to that office Prior to the Taxpayer Relief Act of 1997 it was unclear under the Code whether a trust that is a foreign trust within the meaning of new Code sect 7701(a)(31) but that has a United States trustee with an office in the United States would be treated as having United States source income to the extent that trustee

i directed the sale of personal property

Paragraph (a)(3) of the proposed regulation clarifies this issue by providing that a foreign trust will not be considered to be present in the United States for purposes of Code sect 871(a)(2)

The same result is now achieved by statute Section 641(b) was amended by the Taxpayer Relief Act of 1997 to provide that in determining the income of a foreign trust the trust shall be treated as a nonresident alien individual who is not present in the United States at any time

I General Comments

New Code sect 7701(a)(30)(E) and (31) and the proposed regulation make it simple for United States and foreign persons to create foreign trusts They do not however make it simple to create a domestic trust In fact they both seem curiously biased in favor of foreignness

For example a United States person who wants to name her brother who is a nonresident alien as the trustee or as one of two trustees of her testamentary trust for her children will be able to do so only if she is willing to have her trust treated as foreign

I0 Such a change can now result hi immediate income tax liability under sect 684 as enacted by sect 1131 of the i Taxpayer Relief Act of 1997 Under prior law such a change could have resulted in immediate tax liability under sect 1491 of the Code which was repealed by sect 1131 of the Taxpayer Relief Act of 1997

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We do not see what policy goal is advanced by forcing United States persons to create foreign trusts Indeed it is likely that less United States income taxes will be collected if more trusts are foreign than would be collected if more were domestic

We think it would be sensible if Code sect 7701(a)(30)(E) were amended to permit a settlor or her trustees to elect domestic status so that those who would like to avoid foreign status and to pay United States income taxes currently will be able to do so Section 1161 of the Taxpayer Relief Act of 1997 gave Treasury the power to create by regulations such an election for trusts which were in existence on August 20 1996 (other than so-called grantor trusts) and which were treated as United States persons on the day before the enactment of the Act

We see no reason why such an election should not apply to all trusts regardless of when created The United States should encourage rather than discourage the creation of domestic trusts

Unless and until such a choice is legislatively provided we believe the proposed regulation should reduce its bias in favor of foreignness by for example narrowing the kinds of decisions that are treated as substantial decisions the control of which by foreign fiduciaries causes a trust to be foreign and by changing the control test so that the authority to determine less than substantially all of the issues regarding the administration of the trust is sufficient While we recognize the benefits in the form of certainty which an objective test brings we believe that the changes we propose could be adopted without substantially interfering with the ability of those who wish to form a trust that is foreign to do so At the same time we think changes are needed to ensure that United States persons who wish to create domestic trusts are not found to have inadvertently organized a foreign trust

Treasurys focus ought to be on those matters relating to the administration of a trust that are likely to affect its enhanced enforcement program relating to foreign trusts It is difficult to see how this program would be adversely affected if a trust whose only foreign connection is the foreign status of an individual who has the right to veto the appointment of new trustees were permitted to treat itself as domestic To the extent it believes the program would be adversely affected it could protect against whatever risk it perceives by requiring the same level of disclosure from such trusts as it does from trusts that are treated as foreign trusts

II Specific Comments

A The Definition

1 The Safe Harbor

We fear that the safe harbor is seriously flawed because it is so restrictive that it is likely to benefit only a few ie those who are best advised The regulation does not make clear whether or not it is mandatory that the trust document itself specify a United States trustee while Regulation sect 3017701-7(c) does not explicitly state such a

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requirement the preamble and the example in paragraph (c) seem to point the other way Since the normal United States trust document does not mandate a United States trustee

even if that is clearly contemplated we urge that the safe harbor be made clearly applicable in the case of any trust if a majority of the trustees are United States persons

Similarly in that example there is a sentence reading No person other than DC has any power over the trust We do not know what power means in this context ie whether it means that under the safe harbor all substantial decisions with respect to the trust must be made by the trustee in the United States thus perhaps precluding the use of a foreign investment advisor If so this would limit the usefulness of the safe harbor We urge that a trust should be able to satisfy the test if it is in fact administered in the United States again regardless of whether this is mandated by the trust document In any event the relevant rules should be made explicit and spelled out in detail

Another prong of the safe harbor test requires that the trust not have an automatic migration provision as defined in paragraph (d)(2)(v) or (e)(3) of the proposed regulation An automatic migration provision is a provision that provides that a United States courts attempt to assert jurisdiction or otherwise supervise the administration of the trust would cause the trust to migrate Example 3 of paragraph (d)(3) illustrates the application of this provision by describing a migration clause that is triggered by a suit in a United States court by a creditor of the trust

While a migration clause of this type might appropriately cause the trust to be foreign the text seems far broader It would seem to apply for example to the more typical provision that would cause a trust to migrate in the event that the United States were invaded by a foreign power or in the event that the United States enacted a law that would confiscate the assets of trusts created by certain persons No good purpose is served by forcing all trusts with these types of clauses to be treated as foreign

We believe the migration clause provision should not extend to migrations triggered by events that are not particular to a given trust or its beneficiaries trustees or grantor

2 The Court Test

We believe the court test may work in ways which will trap unwary United States taxpayers It appears to us mat under section (d)(2) of the regulations it may be mandatory in order to satisfy this test that even in the case of the simplest inter vivos trust eg one established by a United States citizen and resident for her United States children that that trust be registered by an authorized fiduciary in a court within the United States (and that will suffice only if the relevant state statute meets certain standards) or that the fiduciaries andor beneficiaries take steps with a court that cause the administration of the trust to be subject to the primary supervision of such court While the definitions of the court test (section (d)(l) of the regulations) do not appear to require this these requirements are found in [Situations that meet the court test in section (d)(2) of the regulations If those situations are intended to be exclusive then again many if not most United States trusts will fail the test Further the proposed regulations suggest that the court test may not be met without some affirmative action by

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trusts that are unquestionably subject to the jurisdiction of a United States court under applicable statutes andor the provisions of the trust instrument Hence clarification or a substantive change is vitally necessary to make it clear that no action is necessary to satisfy the court test if a United States court in fact would have jurisdiction under applicable law

The court test is also subject to the migration clause provision described above If a trust mat otherwise satisfies the court test has such a provision it will be a foreign trust For the reasons described above we do not believe the migration clause should prevent a

trust from being treated as domestic to the extent it does so in its present form

3 The Control Test

a Breadth of Test

The control test is overly broad both in terms of the kinds of powers that are treated as substantial and in terms of the way in which control is defined It is likely to force trusts to be foreign simply because one or more foreign persons has even a relatively minor role to play in the trusts administration

For example the power to make trust investment decisions if held by a foreign person even if the decisions may be vetoed by a United States person will cause the trust to be foreign This means that a trust will be a foreign trust if a United States trustee revocably delegates investment authority to a foreign investment advisor

In addition the power to remove add or replace a trustee if held by a foreign person (other than the grantor or beneficiary) will cause the trust to be foreign Granting such significance to this kind of power is inconsistent with the regulations under Subchapter J Subpart E11 and with the Internal Revenues position with respect to the transfer tax consequences of a retained power to change trustees12

Control is defined as the ability to make a decision without being subject to veto by anyone else The statute could have been interpreted to treat a United States person as being in control of a particular decision if she had the power to veto another persons ability to make the initial decision

As suggested above the characterization of decisions as substantial and the manner in which control is defined should be narrowed in order to make it easier for those who wish to have trusts treated as domestic and to pay United States tax currently to accomplish this objective No good tax policy is served by putting statutory and regulatory obstacles in their path

b Powers Held by Grantors and Beneficiaries

i See-Tress Reg 1674(d)-2

I2 SeeRev Rul 95-58 1952-2 CB 191

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The proposed regulations treatment of powers exercisable by grantors and beneficiaries has no statutory basis and is likely to defeat the competitive level playing field that Treasury was trying to achieve when it proposed the statutory basis in favor of foreignness Nothing in the statute suggests that the significance of a power is diminished by the fact that it is held by a grantor or beneficiary The kind of trust a nonresident alien is likely to be willing to create within the United States with a United States fiduciary is not one of which she will be trustee Thus the controls she retains over the trust although extensive will be exercisable by her in an individual rather than a fiduciary capacity The proposed regulation treats all such powers as nonsignificant and her trust therefore will be domestic rather than foreign

4 Summary

While we recognize the desirability for certainty in determining the United States status of trusts we believe these proposed regulations go much too far in favoring foreign status and by reason of the restrictions they place on the creation of domestic trusts will cause confusion and hardship to many United States taxpayers who organize trusts in the United States without thought to probable foreign status It serves no purpose to turn sect 7701(a)(30)(E) into a confusing trap for average United States taxpayers largely in order to create certainty for foreigners

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Until such time as such legislative relief is enacted the report urges that the proposed regulations be modified to reduce their apparent bias in favor of treating trusts as foreign Thus the report urges that the tests set forth in the proposed regulations for determining when a trust is foreign be modified to reduce the risk that US persons wishing to organize a domestic trust may inadvertently fail to meet such tests and find that they have inadvertently organized a foreign trust The report recognizes that as currently drafted the regulations gives desirable assurance to foreigners that trusts which they wish to treat as foreign trusts will be so treated but suggests that certainty can be given to foreigners without the use of tests which may prove to be a trap for unwary US persons wishing to create domestic trusts The report comments on specific portions of the proposed regulations noting the provisions which are particularly likely to give rise to these difficulties and suggests changes to ameliorate the problems

Finally the report approves the regulatory confirmation that foreign trusts will not be treated as present in the United States for purposes of Section 871(a)(2) of the Code while noting that this result is now embodied in Code Section 641(b) as well

If we can be of any further assistance to you or your staff in finalizing these regulations please contact either Carlyn McCaffrey the principal drafter of this report at (212) 3 10-8136 or the undersigned

Sincerely

jf 1

Richard O Loengard Jr Chair

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3 The Control Test

a Breadth of Test








I2 SeeRev Rul 95-58 1952-2 CB 191

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4 Summary


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4 Summary


-10shy

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